COMMON CAFR FINDINGS

COMMON CAFR FINDINGS Government Finance Officers Association of Louisiana 2009 Fall Conference October 8, 2009

Background • Use of GFOA materials today • GAAP or CAFR--Certificate of Achievement for Excellence in Financial Reporting • Established by GFOA in 1945 • Almost 4,000 participating governments nationwide • Among cities over 50,000 population, 74% participation up to 96% for cities over 200,000 • Among counties over 50,000 population-49% participation rising to 84% for those over 200,000 • Among states, 84% participation.

Background • The certificate program has been responsible for standardizing the format for the CAFR and establishing the required content outside the basic financial statements. • GFOA continuously updates checklists for changes in GAAP • Five checklists • General Purpose Governments • School Districts • Stand-Alone Business-Type Activities • Pension and OPEB Systems • Cash & Investment Pools

Eligibility • Must be a State or Local Government • Must publish a CAFR • Must comply with GAAP • Must have Clean Audit Opinion of at least BFS with a “in relation to” for remaining contents • Must respond to prior year comments • Must submit within 6 months of year end

CAFR Review • Submissions are reviewed by three reviewers, one staff and two volunteers from the Special Review Committee • Volunteer cannot be from the same state as the CAFR or be employed by the same audit firm. • Must have consensus to receive the award • Watch for the * as it indicates a potentially disqualifying item • Notification of results

CAFR Contents • Letter of Transmittal • Independent Auditor’s Report • Management’s Discussion and Analysis • Component Units • Government-wide Statements • Fund Financial Statements – general • Government Funds • Proprietary Funds • Fiduciary Funds • Notes to the Financial Statements • Required Supplementary Information • Combining and Individual Fund Statements • Statistical Section

General Comments • Amounts disclosed throughout the CAFR must agree with the financial statements • ‘Boilerplate Language’ should be eliminated as much as possible • disclosures should cover the requirements but should be specific and unique to each government • Spreadsheet errors (mathematical errors and non-articulation of amounts between statements and schedules) • All financial statement disclosures must be consistent with the proper basis of accounting • Any reconciliation provided throughout the CAFR must have sufficient detail so that the reader may clearly identify the reconciling item

Letter of Transmittal • Inappropriate date • Date its letter of transmittal to reflect when the CAFR was first made available (i.e., transmitted) to its intended users • Earlier date allowed • Provided that it was no earlier than the date of the independent auditor’s report • Failure to reference MD&A • The same users are likely to take an interest in both the letter of transmittal and management’s discussion and analysis (MD&A) • Reference MD&A in their letter of transmittal • In practice, this reference is frequently missing

Independent Auditor’s Report • Failure to adequately describe audit coverage • Independent auditor’s report should describe the audit coverage provided for all of the contents of the financial section of the CAFR • Two common failures: • Include schedules other than combining and individual fund statements in the various subsections of the financial section of the CAFR • The independent auditor’s report should state, at a minimum, that those schedules are fairly presented “in relation to” the basic financial statements • GFOA encourages governments to present mandated budgetary comparisons for the general fund and major special revenue funds as part of the basic financial statements rather than as required supplementary information (RSI) • The independent auditor must render an opinion on the fair presentation of the budgetary comparison

Management Discussion & Analysis • Scope of analysis is too narrow • MD&A must provide needed analysis for both the government-wide financial statements and the individual major fund financial statements • Governments address one at the expense of the other • If the same transaction or event affects both, the analysis should be crafted in a manner that minimizes duplication • Analysis in MD&A also should cover both revenues and expenses/expenditures • Expenses/expenditures often neglected

Statement of Net Assets • Calculation of a component of net assets • Errors continue to occur in the calculation of the various components of net assets, especially invested in capital assets net of related debt • The most common are as follows: • Wrongly treat debt as capital-related before capital acquisition has actually occurred. • Do not include debt proceeds nor the debt that gives rise to those proceeds, until the proceeds have actually been expended • Net unamortized bond issuance costs against bonds payable • Incorrectly including accrued liabilities • Erroneously excluding intangible assets used in operations from the calculation of invested in capital assets net of related debt • The specific reasons why a portion of net assets is classified as restricted need to be presented

Statement of Activities • Contributions of capital assets incorrectly classified • Contributions of capital assets qualify it for classification as program revenue - capital grants and contributions. • Improperly classifying such contributions as general revenue • Internal movement of capital assets incorrectly reported • Capital asset associated with activities reported in a governmental fund (e.g., general fund) is moved to a fund included in business-type activities • Effect is asymmetrical in the fund financial statements (i.e., the general fund cannot report the surrender of the capital asset, which it never reported to begin with, but the enterprise fund must report its receipt) • The recipient fund should report a capital contribution (rather than a transfer) • Incorrectly reporting movement of a capital asset as a capital grant (revenue)

Statement of Activities • Special items • GASB Statement No. 34, specifically limits the use of the special items category to “significant transactions or other events” • Because of the disparity in measurement focus between the governmental fund financial statements and the government-wide financial statements, it is possible for the same transaction or event to be significant to one, but not to the other • In that case, the classification special item should be reserved for the financial statements where the transaction or event is, in fact, significant • Some governments classify an insignificant transaction or event as a special item, solely because it is so classified in another set of financial statements where it is, in fact, significant

Fund Financial Statements - General • Missing major funds • Many governments are failing to present as major funds governmental funds and enterprise funds that clearly meet both the 10 percent test and the 5 percent test for mandatory major fund reporting • Major initiatives, especially capital projects, can alter the results of applying the 10 percent test and the 5 percent test from one year to the next • Important that governments reapply these tests each year • External reporting of intrafund transfers • Proper to report transfers between departments reported in the same fund for internal accounting purposes • Intrafund transfers must be eliminated from general purpose external financial reporting

Governmental Funds • Excessive balance for compensated absences • GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements, paragraph 14, limits the liability reported in a governmental fund to just the portion due to employees separated from service as of the end of the fiscal period • Governments continue to report a fund liability well in excess of this amount • Failure to report unreserved fund balance by fund type • Governments report nonmajor governmental funds in a single column in the governmental fund balance sheet, regardless of fund type • GASB Statement No. 34 requires that unreserved fund balance for nonmajor funds be classified by fund type

Governmental Funds • Failure to report other financing source for debt at face value • GASB Statement No. 34 directs that the amount of the other financing source that governmental funds report upon the issuance of long-term debt be equal to the “face amount” of the debt • Incorrect reporting of an other financing source equal to the amount of the proceeds received for debt issued at a discount • Report the discount as either an expenditure (for an underwriter’s discount) or as an other financing use (for an original issue discount) • Incorrect reporting of a single other financing source equal to the face amount of the debt plus an original issue premium • Latter ought to have been treated as a separate other financing source

Governmental Funds • Inappropriate expansion of other financing sources and uses category • Other financing sources and uses category was intended to isolate certain one-time inflows or outflows of current financial resources that might otherwise distort revenue and expenditure trends • Only items specifically designated by authoritative standards as other financing sources or uses may be classified as such • Mischaracterization of loan repayments as revenue • Governmental funds should handle the collection of principal on a loan receivable as a purely “balance sheet” transaction (i.e., a reduction of the related receivable) • Number of instances where such cash receipts have been miscategorized as revenue

Proprietary Funds • Failure to classify certain restricted assets as current • GASB Statement No. 34 requires that governments present the proprietary fund statement of net assets using a classified format (i.e., current v. long-term) • Restricted assets that are available to liquidate current liabilities (e.g., resources in a current debt service reserve account associated with a revenue bond issue) should be classified as current despite their restricted character • Should not be included as part of long-term assets, • Should not be reported in a separate category between current and long-term assets • Inadequate detail for a classified presentation • Not enough to distinguish current assets and liabilities from long term assets and liabilities in a classified presentation • Necessary to furnish appropriate totals and labels (e.g., total current assets). • CAFR reviewers frequently find totals or labels missing from classified presentations

Proprietary Funds • Misclassification of compensated absences • Inappropriate reporting of the entire balance of compensated absences as a current liability (Misapprehension that the entire balance is due inasmuch as all employees theoretically could use their accumulated vacation leave within the next 12 months) • Normally should not classify the entire balance of compensated absences as a current liability • Inconsistent classification of items as capital • Capital contribution in the statement of revenues, expenses, and changes in net assets should also be reported as cash flows from capital and related financing activities in the statement of cash flows • Failure to provide a reconciliation • Governments have failed to provide a reconciliation when amounts have differed between the government-wide and proprietary fund financial statements

Proprietary Funds • Missing look-back adjustments • Internal service funds typically are consolidated into governmental activities in government-wide financial reporting • For purposes of consolidation, internal service funds are presumed to operate on a strictly “break even” basis • Profit or loss on operations is treated as an adjustment to the amount reported as expenditure/expense by the internal service fund’s customers (i.e.,“look-back” adjustment) • When a customer fund is reported as a business-type activity, this adjustment necessitates the reporting of a receivable/payable between governmental activities and business-type activities • Asset or liability has not been reported in such circumstances

Component Units • Incorrect classification • GASB Statement No. 14 calls for component units to be blended only if: • Component unit's governing body is substantively the same as the governing body of the primary government OR • Component unit provides services entirely, or almost entirely, to the primary government or otherwise exclusively, or almost exclusively, benefits the primary government • Frequently blending of component units that should be discretely presented because of a misapplication of the second of these criteria. • Criteria #2 intended for situations where the component unit functions essentially as an internal service fund (i.e., rather than providing services to citizens)

Notes to the Financial Statements • Insufficient information for component units • Disclosure requirements for component units have remained unchanged since the issuance of GASB Statement No. 14 • Still common for governments to fail to provide all of the information called for by paragraph 61 • To comply with this requirement, a government should provide information in sufficient detail to justify both the inclusion of a given entity as a component unit and the decision to use blending or discrete presentation • Level of detail is lacking from the component units note

Notes to the Financial Statements • Inadequate disclosure of investment policies • GASB Statement No. 40 requires that governments disclose their policy (or the fact that they do not have a policy) for each of the following investment-related risks (as relevant) • Custodial credit risk • Credit risk • Concentration risk • Interest-rate risk • Foreign currency risk • Only a policy formally adopted by the governing board qualifies as a policy for this purpose • Governments have presented as policy positions that have not been formally adopted (e.g., past practice) • Others have made no disclosure, even though their circumstances make clear that a policy would be relevant to them

Notes to the Financial Statements • Incorrect disclosure of interest-rate risk for positions in investment pools • Disclosure of interest-rate risk focuses on the maturity of investments • Bond fund or external investment pool • Measure of maturity would be the average maturity of the fund’s or pool’s investments • The fact that a participating government could withdraw funds on short notice would not alter that fact • A number of governments are understating their interest rate risk by reporting positions in funds or pools as maturing immediately based on their ability as a participant to withdraw funds on short notice

Notes to the Financial Statements • Incorrect disclosure of interest-rate risk for investments in variable rate debt • Interest-rate risk results from a disparity between the rate of interest on an investment in a debt security and the market rate of interest • In the case of variable-rate debt securities, the disparity in rates normally will cease as of the next reset date (e.g., quarterly). • Thus, interest-rate risk ends as of the next reset date • Number of governments are overstating their interest-rate risk by presenting variable-rate debt based on when the securities ultimately mature, rather than on the next reset date

Notes to the Financial Statements • Improper combining of short- and long-term debt disclosures • GASB Statement No. 34 sets disclosure requirements for long-term liabilities • GASB Statement No. 38, Certain Financial Statement Note Disclosures sets similar disclosure requirements for short-term debt • Both disclosures involve presenting a schedule of changes • Some governments have inappropriately combined the two presentations into a single table • Failure to disclose on-behalf benefit payments • GASB Statement No. 24 has long required government employers to provide certain disclosures in connection with payments of fringe benefits or salaries by legally separate entities on behalf of their employees—missing disclosure

Required Supplementary Information • Inclusion of nonmandated budgetary comparisons • As a rule, generally accepted accounting principles (GAAP) set the minimum standard for presentation and disclosure • Financial statement preparers normally are free, and sometimes are even encouraged, to provide information beyond what is mandated by GAAP • Contents of required supplementary information (RSI), as the term itself indicates, cannot be expanded to include information that is not required • Incorrect presentations of budgetary comparisons in RSI for funds other than the general fund and major special revenue funds

Required Supplementary Information • Improper placement of RSI-related disclosures • Required supplementary information falls outside the scope of the independent auditor’s opinion on the fair presentation of the financial statements • Supporting disclosures related to RSI should be presented as notes to RSI rather than as part of the notes to the financial statements • A number of governments have presented budget-related disclosures in the notes to the financial statements, even when the budgetary comparisons themselves are presented as RSI • Disclosure is always required, in the notes to the financial statements themselves, of any budget-related significant violations of finance-related legal or contractual provisions, even if budgetary comparisons are presented as RSI • Failure to reconcile the basis of budgeting and GAAP • Basis of budgeting and GAAP must be reconciled • Face of the budgetary comparison • Notes to the financial statements/RSI

Combining and Individual Funds • Inappropriate negative balances • Governments sometimes have reported negative balances in accounts where a negative balance is either illogical or prohibited by GAAP • Reserved fund balance • Designated unreserved fund balance • Pooled cash and investments • Deficit should be reported as a liability rather than as a negative asset balance

Statistical Section • Missing per capita information • GASB Statement No. 44 requires governments to present both a per capita ratio of total outstanding debt and a per capita ratio of total general bonded debt • Some governments have provided one but not the other • Miscalculation of debt service as a percentage of noncapital expenditures • The amount of debt service used for purposes of calculating the ratio of debt service as a percentage of noncapital expenditures should be limited to principal and interest payments • Other amounts (e.g., fiscal charges) are being included

Statistical Section • Failure to provide all information required on own-source revenue • Governments are only required to provide information on revenue capacity for their single most significant own-source revenue • If they voluntarily choose to provide information on multiple own-source revenues, they must furnish all of the required information for each such source • Some governments that are voluntarily providing information on property taxes (when they are not the major own-source revenue) are failing to provide all of the information required (e.g., property tax collections)

Statistical Section • Failure to provide adequate detail on significant fees and charges • Statistical schedule of changes in net assets typically presents a single amount for each of the three categories of program revenue, with one important exception • Within the charges for services category the most significant charges must be broken out separately by function, program, or identifiable activity • Common to find governments that have failed to provide the required detail for significant charges • Failure to explain anomalies • GASB Statement No. 44, requires explanations of atypical trends and anomalous data that the users of the financial report would not otherwise understand • Trend data clearly shows a significant change between years, but the government has failed to offer an explanation of why this change occurred

Questions?

COMMON CAFR FINDINGS